Notes of interest for Apple's Q3 2008 financial results call

Apple on Monday announced the best spring quarter for earnings and revenue in company history, and has just finished a financial conference call with analysts and members of the media. Several notes of interest are available from the call.

Apple said third quarter profit rose over 31 percent to $1.07 billion, or $1.19 per diluted share for the three-month period ended June 28, 2008.

Apple regional business segments

Apple Americas accounted for 1,134,000 Mac shipments and $3.435B in revenues. These figures are up 38 percent and 28 percent year-over-year. Sequentially, shipments are up 28 percent with revenue also up 5 percent.

Apple Europe accounted for 576,000 Mac shipments and $1.64B in revenues. Both these figures are up 47 percent and 42 percent year-over-year, but are down sequentially by 8 percent and 7 percent respectively.

Europe is growing at about 4 times the average rate for the region, according to IDC statistics.

Apple Japan accounted for 102,000 Mac shipments and $365M in revenues. These figures have increased by 26 and 41 percent year-over-year, but are each down 14 percent sequentially.

Apple's Asia Pacific (and FileMaker Inc), billed as "Other Segments," accounted for 208,000 Mac shipments and $571M in revenues. These figures are up significantly, by 53 percent and 44 percent compared to the same period a year ago. Sequentially, unit shipments rose 3 percent in the Asia Pacific regions while revenue dropped by the same percentage.

Both Japanese and Asia Pacific results did particularly well for Apple, with the latter growing about 2-3 times the market rate, IDC says.

Apple's "Other Music Related Products and Services" segment accounted for $819M in revenue. The figure represents a 35 percent surge year-over-year, but a 7 percent dip versus the previous quarter.

Apple's "Software, Service and Other Sales" segment provided $501M in revenue, climbing 30 percent versus the same point in 2007 but dropping 5 percent compared to the winter.

Growth was seen in "all regions."

Apple's Mac business

Apple sold 943,000 desktops during the quarter and 1,553,000 notebooks, which equates to spikes in shipments of 49 and 37 percent respectively. Notebook shipments grew faster sequentially than before at 8 percent, while desktops turned around and grew 10 percent themselves.

The combined total of 2,496,000 Macs is a "new record," according to company chief Steve Jobs.

Macs accounted for less than half of Apple's total revenue at 48.3 percent. Revenue in the quarter was nonetheless driven primarily by the Mac.

The company shipped the most Macs ever to higher education during a June (spring) quarter.

There are 3-4 weeks of channel inventory for Macs, which is slightly below Apple's target of about 4-5 weeks.

Apple's Apple TV and iPhone businesses

Apple sold 717,000 iPhones during the quarter and earned about $419M from these and related products over the quarter; it should be noted that Apple's iPhone revenue is deferred over the course of 24 months for each sale.

iPhone 3G revenues are deferred over 24 months, as with the original model.

Customer reactions to the phone have been "overwhelmingly positive."

Over 25 million apps have been downloaded from the App Store in 10 days; about 90 percent of these are $10 or less.

More than 900 apps are available.

The App Store isn't a profit generator and, like iTunes, is there more to boost iPhone and iPod sales.

Apple TV remains a "hobby," as it's not a very large business. However, Apple plans to continue investing in the media hub as the company is still "excited" about it.

Apple is "very confident" with its iPhone 3G production ramp; it can't predict when there will be a balance, but does believe it will have enough supply for additional launches.

This ramp is directly on schedule and isn't believed to be affected by technical issues, even with "staggering" demand. It's difficult to predict this level of demand for a new product with a very different price point than its ancestor.

The company will launch iPhone 3G in 20 additional countries on August 22nd, bringing the total to over 40. The remaining 30 will be ready before the end of the calendar year.

Oppenheimer and the company see customers shifting more towards smartphones in the future than simple voice-oriented phones.

Apple's Retail business

Apple's retail stores combined to sell 476,000 Mac units and generate $1.445B in revenues during Apple's fourth fiscal quarter, marking yearly growth of 44 percent in units and 58 percent in revenue. Sequentially, retail sales were responsible for a 3 percent growth in units but were exactly flat in revenue.

An estimated 32 million customers passed through Apple retail stores, an increase of 10M year-over-year.

Over half of all retail Macs are sold to new customers.

There were 598,000 personal training sessions during the quarter.

Apple opened 8 stores during the quarter, with a total of 216 in operation. With roughly 211 stores open, an average store's revenue was $6.8M compared to $5.1M a year ago —an increase of exactly one third.

There will be 242 Apple stores by the end of fiscal 2008, including new stores opening in Germany and Switzerland in the new quarter.

The Beijing, China store opening this past weekend made Apple "very happy" with its initial results.

About 170 Best Buy stores were added during the quarter to Apple's third-party offerings, with a total of 570. Apple expects to be at about 600 by the end of the summer.

There are 10,300 storefronts carrying Macs, up by 1,600 year-over-year.

Some of the earliest stores are being remodeled.

Apple's iPod and iTunes businesses

About 11,011,000 iPods were shipped this quarter, with the media players generating $1.678B in revenue. The unit shipments climbed 12 percent year-over-year while revenues rose by 7 percent. Sequential results were more mixed, with shipments going up by 3 percent but actual revenue falling 8 percent.

iPod sales were primarily driven by the iPod shuffle and iPod touch.

The company holds over 70 percent of the player market share in the US and Australia, over 60 percent in Canada, and over 50 percent in Japan, Switzerland, and the UK. It has "strong" double-digit share elsewhere.

There are four to six weeks of iPod channel inventory at the end of the quarter.

iTunes now offers 8 million songs, 20,000 TV shows, and 2,200 movies, with 450 of those movies offered in HD.

iTunes contributed significantly to the quarter's results, but also contributed to "elasticity" in pricing.

The iPod touch back-to-school promo is affecting Apple's stocks.

Apple's US iPod sales grew about 10 percent, while international sales grew about 15 percent; the company doesn't otherwise break out its iPod sales by region.

The financial side of Q3

Gross margin hit 34.8 percent, down from 36.9 percent a year before but significantly above guidance of 33 percent.

This came largely on the back of a better commodity environment and product mix.

The tax rate was lower than expected at 29 percent versus 31 percent guidance, largely due to a better mix of foreign profits.

International sales accounted for about 42 percent of all quarterly revenue.

Apple's next fiscal quarter (Q408)

Apple is targeting $7.8B in revenue and earnings per share of exactly $1.

There is a secret "product transition" that will affect Apple's product margins and drop them to about 30 percent, but which CFO Peter Oppenheimer can't talk about today. Whether this applies to the Mac, iPod, or another category is unclear.

Regarding the mystery transition, Apple doesn't want to leave a margin so high that it creates an "umbrella" for competitors to rest under in terms of price; it often releases products at a high price but lowers their costs later.

These state-of-the-art products will have technologies and features that others "can't match," Oppenheimer says.

Gross margins should be about 31.5 percent in the September quarter as a result of this, with these ultimately dropping to 30 percent by fiscal 2009.

The company believes commodity pricing for NAND flash memory will be "favorable," while hard drives and optical drives are in a good supply/demand balance along with other components.

On Apple chief Steve Jobs' health: "Steve loves Apple. He serves at the pleasure of Apple's board. He has no plans to leave Apple. Steve's health is a private matter."

Operational expenses, engineering, and launch expenses can't be deferred, but they're factored into the quarterly guidance.

The company has considered the US economic downturn for its guidance.

Apple is "very confident" it will hit the 10 million iPhone mark for 2008 that it set last year.